Mega-alliances, mega-questions

FMC says it will carefully review the proposed P3 Network and G6’s expansion.

Last month the U.S. Federal Maritime Commission requested additional information about the proposed expansion of the G6 vessel-sharing agreement (VSA).
The carriers in the alliance — APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK and OOCL — are seeking to expand their six-way cooperation into the Asia-U.S. West Coast trade and the transatlantic trade to and from North Europe and the Mediterranean.
The FMC’s request follows a similar one made by the agency in December about the proposed P3 Network that the three largest container carriers in the world — Maersk, Mediterranean Shipping Co. and CMA CGM — want to form.
The agency said the five members of the commission were unanimous in making the requests for additional information.
G6 members are already cooperating on the trades between Asia and the U.S. East Coast and Asia and Europe. (The FMC does not regulate VSAs on trades that don’t touch the United States.) In specific, the carriers currently cooperate in trios on the Asia-U.S. West Coast and transatlantic trades as the Grand Alliance (Hapag-Lloyd, NYK and OOCL) and New World Alliance (APL, Hyundai and MOL).
The carriers will now address questions the FMC has put forth to them. Once those replies are received, the commission will have 45 days to review the answers, after which the agreement will go into effect unless the FMC seeks an injunction.
The FMC did not reveal exactly what kind of information it’s seeking, nor is it known how quickly the carriers will respond to the requests for additional information.
However, both carrier groups have indicated they would like to start the VSAs in the second quarter of 2014, so their responses could come before the end of February.
FMC Commissioner William P. Doyle said he agreed with the commission's questions and submitted his own to the G6 relating to the impact it would have on “consumers, the U.S.-flag international fleet, small businesses and third-party interests such as terminals, vendors and bunker suppliers."
"I trust that the G6 parties will thoroughly address all the questions posed in the commission’s request for additional information,” he said.
Doyle said the proposed G6 amendment for its new global network anticipates 180–220 vessels with maximum capacities of 14,000 TEUs.
In comparison, the P3 Network proposes an initial deployment across all U.S. trades with an annual capacity of 130 vessels that range between 4,000 TEUs and 12,250 TEUs. The P3 VSA proposes to eventually expand to a maximum of 180 vessels with capacities up to 19,200 TEUs.
In developing his questions about the P3, Doyle said he took into account comments to the commission from groups such as National Industrial Transportation League, Global Shippers' Forum and International Longshoremen’s Association.
Commissioner Richard Lidinsky said he could not discuss the full “meat” of the questions submitted to the alliances, but added it was critical the FMC “take the appropriate time and put in the effort to fully vet the P3 agreement.”
In light of the great protection that liner companies are given under U.S. antitrust law, and the fact that the companies are foreign-based, “we have an obligation to look at these things very closely,” he said.
The FMC reviews VSAs and other agreements to determine if they are in compliance with the Shipping Act, and continues to monitor them once they become effective.
It can seek an injunction to prevent an agreement from coming into effect only if it finds "the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost."
That’s considered a high hurdle, and one that has only been invoked once when the FMC attempted to block an agreement between the ports of Los Angeles and Long Beach in 2008, but was turned down by a federal court.
“People will still say to this day that ‘you had the [the 1984 Shipping Act] in effect for 25 years, and where the one time the commission goes to use the injunctive power, and they couldn’t carry the case,’” Lidinsky said.
He also noted this is the 30th anniversary of the 1984 Act and there have been some informal suggestions that the law be changed, so instead of the FMC having to prove an agreement should not be implemented because it would give an unfair advantage to carriers by decreasing competition or increasing rates that the burden of proof be put on the carrier to prove it’s not going to cause an unfair advantage.
Lidinsky said the FMC “brought the 1984 Act on itself” by long delays and what he called “unreasonable treatment” of even simple port agreements. “But in retrospect, perhaps the law went too far the other way, and in 30 years no agreement has ever been stopped,” he said.
Lidinsky highlighted the larger size of both the P3 and G6 agreements when compared to past VSAs, remarking “to the extent that our people have been seeing vessel-sharing agreements over the years, it would be like saying both a Jaguar and a Ford are cars. There are vessel-sharing agreements and there are vessel-sharing agreements.”
He said with the P3 he’s concerned there had been “an attitude and a tone that the thing was a slam dunk,” with the alliance naming the second quarter of 2014 when it expected the agreement to take effect, as well as appointing an individual, Lars Michael Jensen, who will be chief executive officer of the P3’s operations center in London.
“You have to have respect for the government that gives you operating authority,” Lidinsky said.
“The ball is now in their court,” he added. “I think the fact that they haven’t answered so far shows the depth and complexity and the concern of the commission with the questions that it posed. Then comes the G6 along the same track and obviously the same caring overview had to be given.”
Lidinsky said he was particularly interested in finding out more about the proposed “service centers” that both the P3 and G6 have mentioned in their plans.
In an interview with the Danish publication Shipping Watch in September, Jensen said at the P3 there would be “watertight shutters in place between us and the carriers, but we will also serve as a bridge between the three carriers," which he noted have "strong wills of their own and long independent histories,” but must now work together.
“The network center will handle the collaborative aspects,” he said. “The biggest challenge here will be that we'll sometimes be looking at three different opinions on what to do, but the network center will be an independent operational center, so we'll be the ones making a judgment call in the specific situation.”
The G6 has also commented it may set up one or more service centers, and Lidinsky said it was imperative for the FMC to fully understand the implications of what has been proposed.
He said one particular concern is how the proposed service centers will operate autonomously of the parties to the agreement, and “how the five members of the G6 Alliance belonging to the Transpacific Stabilization Agreement (TSA) will act independently from the one lone independent carrier in setting rates for certain routes covered by the agreement."
TSA is a discussion agreement to which 15 carriers, including the three P3 members, five members of the G6 (the exception is MOL), as well as all the members of the CKYH Alliance and three other carriers belong. TSA members can exchange market information and develop non-binding guidelines for rates and charges.
When TSA expanded last year to include both westbound and eastbound transpacific traffic, it was told it no longer had the authority to discuss and reach an agreement on restricting capacity in either the inbound or outbound directions.
The FMC also required the amended TSA to set up shipper committees, provide transcripts, and attend semiannual meetings with commission staff.
Some analysts see the alliances as an important tool for carriers in their drive to reduce costs.
London-based Drewry said in January it believed the majority of the container shipping industry lost money in 2013 and forecast freight rates would remain weak.
It noted the mega-alliances are being formed at a time when a number of carriers have announced plans to sell non-core assets. For example, in January, Maersk announced plans to sell its VLCC (very large crude carrier) fleet and retail stores; MOL said it was selling a half interest in its TraPac terminals in California; and both Hanjin and Hyundai Merchant Marine have announced plans to shed a number of affiliates.
In its 4th quarter Container Forecaster report, Drewry wrote “the advent of the P3 alliance in 2Q14 is a game-changer for the three biggest lines to obtain more cost savings."